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Central Bank backs scheme

The Central Bank has warned that any State-backed mortgage insurance scheme could damage the property market by introducing “systemic problems”.

In an economic letter outlining the pros and cons of the introduction of a mortgage insurance scheme — to make home loans more attainable and affordable to buyers in light of new lending rules and mandatory deposit levels for borrowers — Central Bank senior economist Niamh Hallissey said it would be a riskier move if guaranteed by the State rather than backed by insurers.

“From a macroprudential perspective [which evaluates health, soundness, and vulnerabilities of a system], mortgage insurance does not remove the risk of a systemic crisis, but shifts this risk from the lenders to the insurers. If this risk is concentrated in a small number of mortgage insurers, or in a State-owned insurer, this could increase the systemic problems in the underlying market,” she said.

Ms Hallissey said an exemption for adequately insured mortgages from the Central Bank’s proposed new deposit limits could alleviate liquidity constraints for first-time buyers, but also damage effectiveness of the loan-to-value cap plan.

Ms Hallissey also raised consumer protection concerns, such as the pricing and transparency of different policies, saying the overall cost of mortgage insurance to the borrower is difficult to calculate.

“The cost of mortgage investment would depend on the product offered and what was being insured. If the cost of such insurance was to be very large, it would likely be capitalised onto the mortgage principal and would increase household indebtedness,” she said.

The company Genworth Financial last year estimated that if all mortgages to first-time buyers over 80% loan-to-value are required to have mortgage insurance, the gross premium a lender would have to pay would range from 0.5%-2.5% of the loan amount.

“The experience of other countries suggests that the cost of mortgage insurance can be significantly higher,” Ms Hallissey warned.

“It is difficult to calculate the overall cost of mortgage insurance to a borrower, given the various trade-offs involved.”

The lack of scale in the market and the costs of the recent financial crisis add to the difficulty in identifying an accurate cost of mortgage insurance, she added.